When it comes to the Australian Securities and Investments Commission’s (ASIC’s) product intervention and design and distribution (DDO) powers the devil for financial advisers is unquestionably in the detail.
The devil is the degree to which financial advisers will be held accountable for the products which are utilised by their clients in circumstances where a consultation paper issued in late December, last year, clearly seeks to rope them in as “distributors” and make them responsible for ensuring the products are appropriate.
The DDO obligations are based on good intentions in terms of enhancing consumer protections, but debate is already occurring around the degree to which the regime should create greater transparency for the consumers themselves about what is and is not appropriate for them.
While many financial advisers will have vivid memories of the negative fall-out which surrounded previous product failures, they will need to be alert to the degree to which regulatory regime being canvassed by ASIC in its discussion paper is likely to impact them.
While product manufacturers will be required to define who are the appropriate people to use their products via a “target market determination”, thereafter a good deal of responsibility will be imposed on advisers/distributors.
The specific words used in the ASIC discussion paper are:
“Distributors generally interact directly with the end consumer. A distributor must take reasonable steps that will, or are reasonably likely to, result in its retail product distribution conduct being consistent with the target market determination. In this way, a distributor plays a key role in ensuring that the target market determination is adhered to and that the objectives of the design and distribution obligations to improve consumer outcomes and promote the provision of suitable financial products to consumers are achieved.
“Distributors are prohibited from distributing a product unless a target market determination has been made. A distributor must also notify the issuer of a product of any significant dealings in the product that are not consistent with the target market determination. These obligations are critical to reduce harm to consumers in such circumstances.”
Elsewhere, the ASIC discussion paper then states that: “A distributor must keep complete and accurate records of distribution information, include:
- The number of complaints received about a product; and
- Information specified by the issuer in the target market determination.
In other words, licensees and their authorised representatives will have to be able to prove they had a detailed understanding of the target market for a product and well-documented proof of how they handled the distribution of that product.
They will also have to bear in mind that ASIC has already made clear that it will closely monitor how “distributors” are paid with the onus being placed in product issuers.
“We will take into account whether a conflict, potential conflict or apparent conflict of interest exists (including in remuneration and incentive structures proposed for distribution), and the issuer’s ability to eliminate or appropriately manage those conflicts of interest,” the ASIC discussion paper said.
“In developing remuneration and incentives for the distribution of a financial product, we expect an issuer will consider the role that incentives have in influencing behaviours that could result in distribution being inconsistent with the target market determination, and the harm that could arise as a result. If the issuer decides it is likely that incentives will influence behaviours that result in distribution being inconsistent with the target market determination, we expect that this will be a consideration in altering distribution channels or not proceeding with that distributor.”
The key for financial planning organisations will be ensuring that product manufacturers accept appropriate responsibility for their offerings, with advisers not being made to carry the can when products fail.